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PRAIRIE MINING LIMITED

Interim Financial Report for the Half-Year Ended31 December 2016

ABN 23 008 677 852

CORPORATE DIRECTORY

The Directors of Prairie Mining Limited present their report on the Consolidated Entity consisting of Prairie Mining Limited ("Company" or "Prairie") and the entities it controlled during the half-year ended 31 December 2016 ("Consolidated Entity" or "Group").

DIRECTORS

The names and details of the Company's Directors in office at any time during the half-year and until the date of this report are:

Directors:

Mr Ian Middlemas ChairmanMr Benjamin Stoikovich Director and CEO

Ms Carmel Daniele Non-Executive Director

Mr Thomas Todd Non-Executive Director Mr Mark Pearce Non-Executive DirectorMr Todd Hannigan Alternate Director

Mr Emil Morfett Non-Executive Director (resigned 31 July 2016)

Unless otherwise shown, all Directors were in office from the beginning of the half-year until the date of this report.

OPERATING AND FINANCIAL REVIEW

Operations 

Highlights during, and subsequent to, the end of the half-year include:

Debiensko Hard Coking Coal Project

· Acquired the Debiensko Hard Coking Coal Project ("Debiensko" or "Project"), a fully permitted, hard coking coal project located in the Upper Silesian Coal Basin in the south west of the Republic of Poland.

· Transformational acquisition marking Prairie's entry into the hard coking coal sector, complementing Prairie's advanced Jan Karski Mine, and creating a multi-project coal development company based in Poland to supply European industry.

· Commenced a scoping study ("Scoping Study") for Debiensko which will evaluate options for the near term development of profitable coal seams whilst minimising upfront capital costs. Results for the Scoping Study are expected to be finalised in the coming days.

· Completed a Maiden Coal Resource Estimate ("CRE") of 301 million tonnes of hard coking coal at Debiensko.

· Results from a fully cored borehole drilled at Debiensko during 2015/16 confirmed historical data indicating that Debiensko hosts a range of premium quality hard coking coals comparable to internationally traded benchmark coking coals.

Jan Karski Mine

· Prairie and China Coal signed a landmark Strategic Co-operation Agreement to advance the financing and construction of Prairie's Jan Karski Mine in Poland.

· Under the terms of the agreement, China Coal No.5 Construction Company Ltd ("China Coal") and Prairie intend to complete a Bankable Feasibility Study ("BFS") in the second half of 2017, which will provide the basis for an EPC contract and a construction-funding package for the Jan Karski Mine.

· The Strategic Co-operation Agreement demonstrates the increasing economic collaboration between Poland and China following China's proposed "One Belt, One Road" development strategy and highlights Poland's importance as a "One Belt Economy" for accessing key European markets.

· Permitting process for the mining concession application continues.

Other

· Coking coal continues to be classified by the European Commission as the third most economically important "critical raw material" for the European economy.

· Cash on hand of $13.1 million and CD Capital's right to invest a further A$68 million as a strategic partner places Prairie in an excellent financial position to progress with its planned development activities at Debiensko and the Jan Karski Mine.

Debiensko Hard Coking Coal Project

During the half-year, the Company acquired Debiensko, a fully permitted, hard coking coal project located in the Upper Silesian Coal Basin in the south west of the Republic of Poland. The Project is located approximately 40 km from the city of Katowice and 30 km from the Czech Republic. The transaction was completed by Prairie purchasing all of the issued shares in Karbonia S.A. ("Karbonia")

Debiensko is bordered by the Knurow-Szczyglowice mine in the north west and the Budryk mine in the north east, both owned and operated by Jastrzębska Spółka Węglowa S.A. ("JSW"), Europe's leading producer of hard coking coal.

The Debiensko mine was originally opened in 1898 and was operated by various Polish mining companies until 2000 when mining operations were suspended due to a major government led restructuring of the coal sector caused by a downturn in global coal prices. In early 2006 New World Resources Plc ("NWR") acquired Debiensko and commenced planning in order for the Project to comply with Polish mining standards and with the aim of accessing and mining hard coking coal seams. In 2007, the Minister of Environment of Poland approved the development plan and in 2008 granted NWR a 50-year mine license for Debiensko.

Debiensko is fully permitted with established on-site facilities including rail, road and power infrastructure, comprehensive historical drilling data and all environmental consents. As a brownfield development project with significant historical capital investment Debiensko is positioned to become a meaningful, regional hard coking coal producer in the near-term.

Scoping Study Underway

During the half-year, Prairie commenced work on a scoping study ("Scoping Study") in accordance with the JORC Code (2012) at Debiensko which is expected to be completed in the coming days. The Scoping Study will be completed to international standards and will focus on near term production opportunities with minimal upfront capital.

Prairie has appointed Royal HaskoningDHV to complete the Scoping Study given their extensive and recent track record of successful involvement in European underground coal projects in the UK, Kazakhstan and Poland, including Prairie's Jan Karski Mine.

Maiden Coal Resource Estimate

Subsequent to the end of the half-year, Prairie completed a maiden CRE at Debiensko which will be used by the Company to support the Scoping Study which will target the highest quality, most laterally extensive and most readily accessible coal seams.

The CRE is reported in accordance with the JORC Code (2012) and comprises 93 million tonnes ("Mt") in the Indicated Category as part of a total CRE of 301Mt. The CRE is based on seven of the thicker, more consistent hard coking coal seams within the Debiensko licence area.

* Rounding errors may occur

* The Indicated and Inferred Resource tonnage calculations are reported with geological uncertainty of +/-10% and +/-15% respectively

Coal Quality

Debiensko has attractive coal quality parameters, within all seams, with the proven potential to produce high quality hard coking coal. The resource estimate does not present washed coal quality results but instead presents only raw unwashed coal parameters.

Prairie has scrutinised the historical data and incorporated data from the recently drilled Debiensko 12 borehole to produce this estimate and confirm the hard coking coal quality. Furthermore, the CRE focuses on seven of the thicker, more laterally extensive coals. Further seams of potentially workable thickness occur but are generally not laterally extensive enough to warrant inclusion at this stage. Coal qualities for the target seams are given in the table below.

All analyses are given on an air dried basis except for volatile matter which is on a dry ash free basis.

A fully cored borehole was drilled by the previous owners in 2015/2016 and a suite of modern coking tests were performed on select seams. Preliminary coal quality analysis from this borehole indicates that a range of premium hard coking coals can be produced from the Project that will be in high demand from European steelmakers. Two premium hard coking coal specifications have been delineated at Debiensko, namely Medium volatile matter hard coking coal ("Mid-vol HCC") and Low volatile matter hard coking coal ("Low-vol HCC").

The borehole was fully cored to 30 m below seam 407/4. All core was subject to detailed logging and core photography. Seam thicknesses and depths have been confirmed by a suite of geophysical logs while coal seams were analysed by accredited laboratories in Poland.

Medium Volatile Matter Hard Coking Coal

The quality of Mid-vol HCC from Debienkso compares favourably with the Australian Goonyella hard coking coal brand, and with medium volatile coals produced in Poland today by JSW. This coal features good rheological properties and coke yield, with reasonably low sulphur levels. Prairie's assessment is that Mid-vol HCC from the Debiensko project would receive premium pricing in European and international markets.

Low Volatile Matter Hard Coking Coal

Debiensko's Low-vol HCC is similar to other internationally traded low volatile matter hard coking coals, including brands such as Peak Downs (BHP Billiton Mitsubishi Alliance - BMA) and Hail Creek (Rio Tinto) produced in Australia. Whilst the Coke Strength after Reaction (CSR) is anticipated to be slightly lower than these Australian coals, the quality of Debiensko Low-vol HCC is anticipated to be in-line with coal produced at JSW's Jas-Mos mine in Poland, which is used as a stabilizing and leaning component of nearly every coal blend for production of blast furnace coke in the region.

Jan Karski Mine

China Coal Strategic Co-operation Agreement

In November 2016, Prairie and China Coal, the second largest coal mining company in China and one of the world's most advanced and prolific shaft sinking and total underground coal mine construction companies, signed a landmark Strategic Co-operation Agreement to advance the financing and construction of Prairie's Jan Karski Mine in Poland.

Under the terms of the agreement, China Coal and Prairie intend to complete a BFS by mid-2017, which will provide the basis for an Engineering, Procurement, Construction ("EPC") contract and a construction-funding package for the Jan Karski Mine.

Prairie and China Coal have been in discussions since 2014 regarding the potential for collaboration in designing and constructing the Jan Karski Mine.

The Strategic Co-operation Agreement was signed confirming the intention of the parties to, on a best efforts basis:

(i) complete a BFS by mid-2017, which will form the basis of Chinese bank credit approval for project finance;

(ii) based on the results of the BFS, enter into a complete EPC contract under which China Coal will construct the Jan Karski Mine; and

(iii) incorporate relevant Polish content into the design and construction phases, which will include working with a range of Polish specialists, sub-contractors and business partners.

It is the intention of the parties to enter into future binding agreements for China Coal to construct the Jan Karski Mine once the Bankable Feasibility Study is completed successfully and indicative financing terms are given by financing institutions.

Mining Concession Application & Project Permitting

Prairie is currently working towards completing a mining concession application which, in Poland, comprises the submission of a Deposit Development Plan ("DDP"), an Environmental Social Impact Assessment ("ESIA") that is to be approved by regional authorities and approval of a spatial development plan (rezoning of land for mining use). The DDP is a Polish standard mine technical-economic study as prescribed in the Polish mining regulations. Under Polish law, the environmental consent decision must be obtained prior to granting of the mining concession. The environmental consent decision is issued by a specialised environmental authority (the Regional Director for Environmental Protection).

The Company is currently progressing with the mining concession application process and intends to formally lodge a mining concession application for the Jan Karski Mine over the next 12 months.

Prairie Downs Base Metals Project ("BMP")

During the half-year, Prairie altered the terms of the farm-in agreement ("Farm-In Agreement") with Marindi Metals Limited ("Marindi") for the sale of the BMP. Under the terms of the Farm-In Agreement, Marindi can earn a 100% interest in the BMP by electing to pay Prairie in three cash instalments as follows: (i) $0.5 million (received on 27 May 2015); (ii) $0.325 million (received 30 September 2016); and (iii) $0.325 million on or before 31 March 2017.

The Farm-In Agreement allows Prairie to focus 100% of its time and resources on its Polish coal operations. Upon completion, Prairie will retain a 2.5% Net Smelter Royalty.

Results of Operations

The net loss of the Consolidated Entity for the half-year ended 31 December 2016 was $5,337,988 (31 December 2015: $6,922,405). Significant items contributing to the current half-year loss and the substantial differences from the previous half-year include to the following:

(i) Exploration and evaluation expenses of $2,595,437 (31 December 2015: $2,357,273), which is attributable to the Group's accounting policy of expensing exploration and evaluation expenditure incurred by the Group subsequent to the acquisition of rights to explore and up to the commencement of a bankable feasibility study for each separate area of interest. As a direct result of exploration and evaluation activities conducted during the half-year, the Group achieved key milestones including (i) commencement of a scoping study at Debiensko; (ii) signing a landmark Strategic Co-operation Agreement to advance the financing and construction of the Jan Karski Mine; and (iii) progression of the mining concession application for the Jan Karski Mine;

(ii) Business development expenses of $484,478 (31 December 2015: $954,178) which includes expenses relating to the Group's investor relations activities during the six months to 31 December 2016 including brokerage fees, travel costs, attendances at conferences and business development consultant costs;

(iii) Expenses incurred in acquiring Karbonia of $500,236 (31 December 2015: nil) which relates to legal, accounting and other consultant costs in relation to the extensive due diligence and legal process conducted by the Company to effectively execute the transaction;

(iv) Non-cash share-based payment expenses of $167,060 (31 December 2015: $706,221) due to incentive securities issued to key management personnel and other key employees and consultants of the Group as part of the long-term incentive plan to reward key management personnel and other key employees and consultants for the long term performance of the Group. The expense results from the Group's accounting policy of expensing the fair value (determined using an appropriate pricing model) of incentive securities granted on a straight-line basis over the vesting period of the options and rights. The decrease in share-based payment expenses in 2016 compared to 2015 is attributable to the fact that there was no grant of incentive securities during the six months to 31 December 2016 coupled with forfeiture of 1.2 million unvested performance rights;

(v) Non-cash fair value loss of $1,847,018 (31 December 2015: $2,385,080) which is attributable to a $1,847,018 loss (31 December 2015: nil) on the conversion right of the Convertible Notes accounted as a financial liability at fair value through profit and loss. There was a nil (31 December 2015: $2,385,080) fair value loss on the B2Gold Corp financial assets at fair value through profit and loss as the Company sold its entire holding during the 30 June 2016 financial year; and

(vi) Other income of $519,849 (31 December 2015: nil) is attributable to the receipt of $325,000 (31 December 2015: nil) pursuant to the Farm-In Agreement with Marindi and the receipt of $194,849 (31 December 2015: nil) of gas and property income derived since acquiring Karbonia in October 2016.

Financial Position

At 31 December 2016, the Group had cash reserves of $13,076,770 (30 June 2016: $18,063,119) and with CD Capital's right to invest a further A$68 million in the Company as a strategic partner, this places the Group in a strong financial position to continue with its planned development activities at Debiensko and the Jan Karski Mine.

At 31 December 2016, the Company had net assets of $12,492,235 (30 June 2016: $17,815,760) a decrease of 30% compared with 30 June 2016. This is largely attributable to the investment made in Karbonia coupled with the loss for the six months to 31 December 2016.

Business Strategies and Prospects for Future Financial Years

Prairie's strategy is to create long-term shareholder value by creating synergies and developing both Debiensko and the Jan Karski Mine in Poland.

To date, the Group has not commenced production of any minerals. To achieve its objective, the Group currently has the following business strategies and prospects:

· complete and publish the Scoping Study on Debiensko, which is scheduled for completion in the coming weeks;

· Commence a focused in-fill drill program to increase JORC measured and indicated resources to support future feasibility studies for Debiensko;

· Deliver a re-engineered mine plan to produce a feasibility study to international standards with a focus on near term production at Debiensko;

· Continue to advance financing discussions with global project finance banks and potential offtakers to structure a development financing package for the Jan Karski Mine;

· Progress with the mining concession process and formally lodge a mining concession application for the Jan Karski Mine;

· Continue other required project development activities including land acquisition at the Jan Karski Mine;

· Continue with Bankable Feasibility Study at the Jan Karski Mine which is scheduled to be completed in the second half of the year; and

· based on the results of the BFS, enter into a complete EPC contract under which China Coal will construct the Jan Karski Mine.

All of these activities are inherently risky and the Board is unable to provide certainty of the expected results of these activities, or that any or all of these likely activities will be achieved. The material business risks faced by the Group that could have an effect on the Group's future prospects, and how the Group manages these risks, include the following:

· The Company's activities will require further capital in future years - The Company currently has cash in excess of $13 million which places it in an excellent position to conduct its current planned development activities at Debiensko and the Jan Karski Mine. However, the ability of the Company to finance capital investment in future years for the construction and future operation of the Company's projects is dependent, among other things, on the Company's ability to raise additional future funding either through equity or debt financing. Any failure to obtain sufficient financing in the future may result in delaying or indefinite postponement of any future construction of the projects or even a loss of property interest (in the future). The key items which the Company would require further funding in future years would be for the construction of the mines at each project. In this regard however, and pursuant to the CD Capital investment agreement, CD Capital has a first right to invest a further $55 million in any future fund raise conducted by the Company, plus CD Capital will have the ability to inject a further $13 million through the exercise of $0.60 options in the Company. There is however no guarantee that CD Capital would take up this right in the future (or exercise their options). There is also a risk that the Company's obligation to offer CD Capital a first right of refusal on any future fund raising could prejudice the Company's ability to raise funds from investors other than CD Capital. However, the Company considers that it would not be necessary to undertake such development actions until it has secured financing to do so and the timing for commencement of such actions would accordingly depend on the date that such financing is secured. If, in the unlikely event that future financing cannot be secured, the Group has the flexibility and ability to significantly reduce its ongoing expenditure.

Furthermore, the Company's board of directors has a successful track record of fundraising for natural resources projects, including large scale coal projects, and has completed successful financing transactions with strategic partners, large institutional fund managers, off-take partners and traders and project finance lenders.

There is however no guarantee that the then prevailing market conditions will allow for a future fundraising or that new investors will be prepared to subscribe for ordinary shares or at the price at which they are willing to do so in the future. Failure to obtain sufficient future financing may result in delaying or indefinite postponement of appraisal and any development of the Company's projects in the future, a loss of the Company's personnel and ultimately a loss of its interest in the projects. There can be no assurance that additional future capital or other types of financing will be available, if needed, or that, if available, the terms of such future financing will be favourable to the Company.

If the Company obtains debt financing in the future, it will be exposed to the risk of leverage and its activities could become subject to restrictive loan and lease covenants and undertakings. If the Company obtains future equity financing other than on a pro rata basis to existing Shareholders, the future percentage ownership of the existing Shareholders may be reduced, Shareholders may then experience subsequent dilution and/or such securities may have preferred rights, options and pre-emption rights senior to the Ordinary Shares. There can be no assurance that the Company would be successful in overcoming these risks in the future or any other problems encountered in connection with such financings.

· Risk of failure to amend Debiensko mining concession - The Company's mining exploration and development activities at Debiensko are dependent upon the alteration of, or as the case may be, the maintenance of appropriate licences, concessions, leases, claims, permits and regulatory consents which may be withdrawn or made subject to limitations. The maintaining of concessions, obtaining renewals, or attaining concessions alterations, often depends on the Company being successful in obtaining required statutory approvals for its proposed activities and that the licences, concessions, leases, claims, permits or consents it holds will be renewed and altered as and when required. In this regard the Company has made an application to the Polish Ministry of Environment to amend the Debiensko mining concession to alter the commencement of production from 2018 to 2025. There is no assurance that such applications (or renewals or alterations) of the concession will be granted or that such applications, renewals, alterations, rights and title interests will not be revoked or significantly altered. If such applications, renewals or alterations of concessions applied for are not granted or are in fact revoked in the future, there is a risk that this may have a material adverse effect on the financial performance and operations of Debiensko, the Company and on the value of the Company's securities.

· Risk of further challenges by Bogdanka - Since April 2015, Lubelski Wegiel Bogdanka ("Bogdanka") has made a number applications and appeals to the Polish Ministry of Environment ("MoE") seeking a mining concession application over the Company's K-6-7 exploration concession and priority right (only one exploration concession which comprises of the Jan Karski Mine). All applications and appeals previously made by Bogdanka have been outright rejected. However Bogdanka has made a further appeal to the Supreme Administrative Court (with no court hearing being scheduled to date). The Supreme Administrative Court has no authority to grant Bogdanka a mining concession but it may however cancel the MoE's previous rejection decision. If the Supreme Administrative Court does cancel the MoE decision, the MoE will be required to re-assess Bogdanka's mining concession application. These proceedings do not relate to the Prairie's valid and existing priority right to apply for a mining concession over the K-6-7 area. As discussed above Bogdanka has in the past raised several appeals challenging the Company's title to the exploration concessions comprising the Jan Karski Mine. There is therefore no guarantee that Bogdanka will not seek to file further appeals to future decisions taken by government departments in the course of the Jan Karski Mine development timeline.

· The Company has a limited operating history - The Company has limited operating history on which it can base an evaluation of its prospects. Despite this, members of the Company's Board of Directors and management team have considerable experience in the exploration, appraisal, funding development and mining of coal projects both globally and in Poland. The future success of the Company is dependent upon a number of factors, including the successful: (i) completion of positive technical and feasibility studies which demonstrates that mining of coal can be economically undertaken; (ii) design, construction and commissioning of the infrastructure required; (iii) progression of permitting and maintenance of title; and (iv) identification of, and agreement with, strategic partners, offtakers and other financiers to fund and assist with the development and operation of mining.

The prospects of the Company must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly in the mineral exploration sector, which has a high level of inherent uncertainty.

· Operations conducted in an emerging market - The Company's operations are located in Poland and will be exposed to related risks and uncertainties associated with this jurisdiction. Changes in mining or investment policies, laws or regulations (or the application thereof) or shifts in political attitude in Poland, in particular to mining, use of coal, and foreign ownership of coal projects may adversely affect the operation or profitability of the Company. The Company continues to consult with the various levels of Government but there can be no assurances that the future political developments in Poland will not directly impact the Company's operations or its ability to attract funding for its operations. The Company also competes with many other companies in Poland, including companies with established mining operations. Some of these companies have greater financial resources and political influence than the Company and, as a result, may be in a better position to compete with or impede the Company's current or future activities.

· The Company may be adversely affected by fluctuations in coal prices - The price of coal fluctuates widely and is affected by numerous factors beyond the control of the Company. Coal prices are currently high compared to previous levels but there is no guarantee that prices will remain at this level in the future. Future production, if any, from the Company's mineral properties and its profitability will be dependent upon the price of coal being adequate to make these properties economic. The Company currently does not engage in any hedging or derivative transactions to manage commodity price risk. As the Company's operations change, this policy will be reviewed periodically going forward.

SIGNIFICANT EVENTS AFTER THE REPORTING PERIOD

(i) On 1 February 2017, the Company announced a maiden CRE of 301 million tonnes of hard coking coal at Debiensko; and

(ii) On 16 February 2017, the Company recouped PLN6.21 million (~$1,985,490) in relation to a prepaid deposit held in escrow due to the unwinding of a transaction entered into by Karbonia when under control by the previous owners, NWR.

Other than the above, there were no significant events occurring after balance date requiring disclosure.

AUDITOR'S INDEPENDENCE DECLARATION

Section 307C of the Corporations Act 2001 requires our auditors, Ernst and Young, to provide the directors of Prairie Mining Limited with an Independence Declaration in relation to the review of the half-year financial report. This Independence Declaration forms part of this Directors' Report.

Signed in accordance with a resolution of the Directors.

BEN STOIKOVICH

Director

9 March 2017

Forward Looking Statements

This report may include forward-looking statements. These forward-looking statements are based on Prairie's expectations and beliefs concerning future events. Forward looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside the control of Prairie, which could cause actual results to differ materially from such statements. Prairie makes no undertaking to subsequently update or revise the forward-looking statements made in this release, to reflect the circumstances or events after the date of that release.

Competent Person Statements

The information in this report that relates to Exploration Results and Coal Resources was extracted from Prairie's ASX announcement dated 1 February 2017 entitled 'Maiden 301 Million Tonnes Hard Coking Coal Resource Confirmed At Debiensko' which is available to view on the company's website at www.pdz.com.au

The information in in the original ASX announcements that relates Coal Resources is based on, and fairly represents, information compiled or reviewed by Mr Jonathan O'Dell, a Competent Person who is a Member of The Australasian Institute of Mining and Metallurgy who is a consultant of the Company. Mr O'Dell has sufficient experience that is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking to qualify as a Competent Person as defined in the 2012 Edition of the 'Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves'

Prairie confirms that: a) it is not aware of any new information or data that materially affects the information included in the original ASX announcements and; b) all material assumptions and technical parameters underpinning the Coal Resource included in the original ASX announcement continue to apply and have not materially changed; c) the form and context in which the relevant Competent Persons' findings are presented in this report has not been materially modified from the original ASX announcement.

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE HALF-YEAR ENDED 31 DECEMBER 2016

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2016

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE HALF-YEAR ENDED 31 DECEMBER 2016

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE HALF-YEAR ENDED 31 DECEMBER 2016

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